Asia Pacific Pulls Down Caterpillar's May Sales by 12% - Analyst Blog


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Caterpillar Inc. ( CAT ) suffered a 30% fall in retail machine sales in Asia/Pacific as miners cut costs, eventually dragging down its global retail sales by 12% for the three months ending May 2014.

This marks consecutive 18 months of declining sales for the mining and construction equipment behemoth, dangerously close to its last 20-month stretch of negative sales from Sep 2008 to Apr 2010 due to the global recession. Following this stint, in May 2010, the company rebounded to sales growth and there was no looking back as sales picked up on strong equipment demand both domestically as well as in emerging markets.

However, tables turned again since Dec 2012 as sales started slipping, affected by tougher year-earlier comparisons, rising inventories of unsold equipment, weak economic conditions, and slowing down of the Chinese economy, which had earlier been the main driver of construction and mining demand.

In 2013, the monthly sales decline rate ranged from 4% to 13%. Caterpillar started 2014 with an 8% decrease in January and February each, but it went further downhill with a 12% drop in March and the 13% reported for April. This May, sales dropped in all regions, while North America was the only saving grace with a 14% increase. Compared to other regions where the declines have worsened, North America has shown considerable improvement in 2014, evident from the growth range of 1% to 6% reported in the first 3 months of the year.

Sales in Latin America plunged 23% in May. Sales in Europe, Africa and the Middle East (EAME) plummeted 22%. As mentioned earlier, Asia/Pacific fared the worst with a 30% slump. The descent in the sales growth trajectory began with a 17% drop each in January and February, followed by 20% in March and 25% in April.

Sales in the Resource Industries segment plunged 46% in April, as decline in sales across all regions offset a 7% rise in North America. Asia/Pacific again fared the worst with a 69% slump, followed by Latin America and EAME with respective declines of 62% and 47%. This does not come as a surprise as sales in Resource Industries will continue to be affected as mining companies have slashed spending in the face of lower commodity prices.

Sales in Construction Industries increased 4%, but were lower than the 9% increase in the first three months and 6% climb in April this year. North America witnessed a 17% increase and Latin America was up 12%. Asia/Pacific and EAME were both down 8%.

Sales in the Energy & Transportation segment moved down 3%. An 8% jump in sales in the Industrial sector and a 4% increase in Oil & Gas were offset by a 13% decline in sales in Power Generation and a 12% dip in the Transportation sector.

Caterpillar's first-quarter revenues remained flat year over year at $13.2 billion affected by weaker results from the Resource Industries segment due to low end-user demand for mining equipment. Caterpillar, nevertheless, delivered a 22% increase in earnings to $1.61 per share, thanks to its incessant efforts to cut down costs, continued deployment of lean manufacturing initiatives and improvement in the Construction segment which helped mitigate the effect of lower mining-related sales on its profits.

In the quarter, Caterpillar witnessed a 16% increase in sales in North America while sales in Europe, Africa and Middle East (EAME) were about flat. Latin America registered a 15% fall mainly due to lower end-user demand for mining equipment. Sales in Asia/Pacific declined 12%, dragged down by lower mining sales in Australia.

Caterpillar expects revenues in 2014 to remain flat with 2013 or move up or down in a 5% range, and earnings per share to be at $6.10 per share. Segment wise, Construction Industries and Energy & Transportation will deliver sales growth, while Resource Industries will continue to disappoint due to sluggish order rates for mining equipment.

Caterpillar also reported a backlog of $19.3 billion at the end of the first quarter, up 7% year over year, driven by improvement in Energy & Transportation, mainly locomotives. This marks a reversal from the decline in backlog reported earlier.

The decline in sales reflects the sluggishness in the mining sector but Caterpillar will weather this storm. The company will benefit from the recovery in the construction sector and macroeconomic stabilization in Europe.
Furthermore, Caterpillar has initiated extensive cost-saving programs across its global businesses. The company will continue to benefit from additional restructuring actions in 2014 to optimize its cost structure and improve its operational efficiency.

Caterpillar currently retains a Zacks Rank #2 (Buy). Some other stocks that are worth considering in this sector include Komatsu Ltd. ( KMTUY ), Gorman-Rupp Co. ( GRC ) and Illinois Tool Works Inc. ( ITW ). While Komatsu and Gorman-Rupp sport a Zacks Rank #1 (Strong Buy), Illinois Tool Works carries a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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